Friday, September 18, 2009

Skype Founders Escalate Legal Battle

SAN FRANCISCO — The founders of Skype, the Internet calling service, appear to be scorching the earth in an effort to scuttle eBay’s sale of the service. On Friday they filed another lawsuit related to the sale.


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EBay Chief Discusses Skype Suit (CNBC)Video

Niklas Zennstrom and Janus Friis, both Danish programmers, sold Skype to eBay for more than $2 billion in 2005, though they kept the ownership of the peer-to-peer software at its heart. The two men then licensed that technology back to eBay and, later, to Joost, an Internet video service they created in 2007 and still own.

Last week, Joost declared that it had removed its former chief executive, Michelangelo Volpi, from its board and had begun an investigation of his conduct. Mr. Volpi put together a group of private equity and venture capital funds that agreed to buy 65 percent of Skype from eBay for $1.9 billion in cash earlier this month.

On Friday, Joost sued Mr. Volpi and his investment firm, Index Ventures. The lawsuit, filed in Delaware state court, asserts that he misused confidential technical information about both Skype and Joost in an effort to persuade investors that he could sidestep a dispute over Skype’s use of the software owned by the founders.

The complaint says that “sophisticated parties,” including Microsoft and Google, considered buying Skype from eBay but “could not get comfortable proceeding with formal bids” considering the legal issues involved.

The lawsuit follows two others filed by the Skype founders. Two days ago, Joltid, another firm they own, sued eBay and the Skype buyers in a district court in Northern California over copyright infringement of the peer-to-peer software.

That lawsuit followed a similar one filed by Joltid in Britain in March that asked a British court to force Skype to shut down. That case is scheduled to come to trial next year.

EBay has said that it was confident of the outcome. “We had a good clean process, we got a good valuation, and our focus now is on getting the deal closed,” said an eBay spokesman, Alan Marks.

In a court hearing in London last June, eBay’s lawyer told the court that if Mr. Friis and Mr. Zennstrom won the case, the result would be “devastating” to the service. Skype has been downloaded by almost 500 million people, many of whom use the software to make free calls to one another.

According to the complaint filed in Delaware, Joost had been trying to merge with Skype through an acquisition of Skype from eBay. This year, it was reported that Mr. Zennstrom and Mr. Friis had unsuccessfully tried to buy Skype back again.

The successful group, led by Silver Lake Partners and Mr. Volpi’s Index Ventures, beat out a rival group lead by Elevation Partners, another Silicon Valley private equity fund.

“Janus and Niklas are pulling out every stop they can, in the hope that they can pry the Skype sale out of Silver Lake’s paws and back into their own,” said Randy Katz, partner with the law firm, Baker Hostetler.

Mr. Zennstrom and Mr. Friis founded Skype in 2002 after creating the controversial peer-to-peer file sharing company Kazaa, which was sued by the Recording Industry Association of America.

A person briefed on the Skype sale process says that as part of the sale, Skype’s founders were offered “hundreds of millions” worth of Skype common stock. The founders declined the offer.

“This is emotional,” this person said. “This is ‘You stole my baby.’ These are two guys who survived lawsuits from the R.I.A.A. They have staying power, they know how the legal system works, and they are not wimps.”

Mr. Volpi declined to comment. The new Skype buyers would not comment either, but they have said publicly that they were well aware of the legal issues.

A person familiar with Silver Lake’s and Index Ventures’s due diligence process said that the investors had hired a risk-assessment company to analyze the legal issues, and the firm produced a lengthy report that chronicled the litigious history of the Skype founders, who have initiated multiple lawsuits against many of their former business partners.

Still, eBay and Skype do not appear to have much room to navigate out of the expanding legal mess. In regulatory filings on the Skype sale, eBay revealed that it had agreed to pay half of any settlement costs and legal judgments. And Skype’s buyers agreed to pay a $300 million penalty if they back away from the acquisition agreement.

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